Every time a company generates a profit, it is faced with two options: put back the profit to grow the business or distribute a chunk of the profit among the employees, investors, and the shareholders. This profit that goes out to those involved is known as the dividend.
Defining high-yield stocks
Now, before we explain what these high-yield stocks are and they function, you need to understand what dividend yield primarily is. Expressed in the form of the percentage symbol (%), the dividend yield is a type of financial ratio that depicts the amount that the company is willing to pay in the form of dividends annually as a relative percentage to the stock price. So, primarily the stock yield is the income that investors would get against the present stock value, in which they have put in their money. Now, stocks that fetch a higher yield as compared to a particular benchmark are called the high-yield stocks. Investors benefit hugely from a high-yielding stock, in a way that it can be a steady source of income for them. When dividends are passively earned, investors put them back in the market with the intent of earning higher profits. Alternatively, this income can also be used by the investors to fund their retirement better or to materialize any life goal.
How to be certain that it is a high-yield stock?
To ascertain that you invest your money in which might be a high-yield stock, you need to check two factors:
- It has displayed steady growth in its dividend percentage.
- There is consistency in the dividend pay-out.
Top features of high-yield stocks
Some of the common features related to high-yield stocks include
- Bringing in a regular flow of income.
- Not being susceptible to any major changes in the economic downfalls.
Benefits of acquiring high-yield stocks
There are a bunch of reasons that explain why, as a potential investor, you should invest in the high-yield stocks. Here, we have listed down some of the top reasons and benefits that will appeal to most investors.
- High-yielding stocks bring in a constant flow of income
If you opt for a good dividend stock, you’ll see that it would bring you a good flow of dividend month after month. These regular returns act as a huge opportunity for the investors to get some consistent income throughout their investment horizon. Furthermore, almost every high yield stock brings you incredible returns and only flourishes over time. - High-yielding stocks accentuate your investment portfolio
The income earned from the high-yield stocks can be used by the investors to build them a corpus fund. This fund will help them achieve long-term financial goals. In case the investors need to reinvest the amount of the dividend, they can opt for other options such as mutual funds. It is an ideal way to diversify the investment portfolio. - They aren’t very volatile
Usually, defensive-sector companies pay out dividends to investors and shareholders. The good thing about the defensive sector is that it isn’t 100% dependent on the market and economic fluctuations. As a result, the stocks from these companies are fairly less prone to market fluctuations. This makes the high-yield stocks from these companies exceptionally less volatile. Thus, these stocks are less susceptible to market risks. As a result of this, these types of stocks are perfect for investors who do not wish to expose themselves to high market risk.
Risks associated with high-yield stocks
Not every high-yield stock implies no risk. There are certainly a couple of risks associated with these stocks. Some of them have been listed below:
- They are subject to changes in the market
Irrespective of the high-yield stock chosen by you, they are certainly subjected to the changes in the market. If a market is not performing up to the mark, the companies might cut down the dividend that they pay to the investors. This will have a direct impact on the price of the stock. So, even the high-yield stock would be negatively impacted. - The companies might decide to reinvest
Another big risk that is associated with the high-yield stocks is that there will be times that the companies that offer you massive dividend decide on cutting it back and reinvesting the whole profit back in the business. This could be a huge loss situation for the investors who had put in their money on the high-yield stocks to fetch greater dividends. - People perceive dividends as the business’ inability to expand
A lot of times, when companies give away a massive dividend to their shareholders, it is perceived that they do not have enough scope and opportunities to take the business to newer heights or diversify and expand the business. - There’s no guarantee
You might get a good dividend out of your high yield stock this year, maybe even next year, but what if a year after that the company decides to cut the dividend? Well, can it do that? Yes, most certainly. A company has a full authority to cut back the dividend and that might be a difficult time for you. So, those who depend solely on the dividend income, please tread carefully as there’s no guarantee, as such. - They slow down the company’s growth
Now, this is a rather tricky situation; to be honest, it might not be the case always. However, there’s a possibility that a high yield stock grows relatively slower than the stocks wherein dividend is not paid. For instance, if a company A earns a profit of $10000. Of this profit, it pays $200 as a dividend, it means that it has $800 to reinvest in the business. So, when the amount of reinvestment is lesser, this means that the growth of the business in the coming years would be relatively lesser. So, if a company showcases a slower growth, it would directly mean that the price of the stock will also grow at a relatively slower rate. It would translate to the fact that even though you make sufficiently good in terms of dividend; however, there’s still only a little appreciation in terms of the price of the stock. One definite way around it is to focus on the yields, which come off the index funds. - If it appears to be good, there might be a problem
There are companies out there that know that there are people who seek high-yield stocks. So, these companies will come up with propaganda under which they’ll offer you a dividend. This will be way past what is a healthy value only to keep the share price afloat and lure more investors. However, pretty soon, this propaganda would fail, and the entire scheme would collapse.
How to find the best high-yield stocks?
When you pick your dividend stocks, please know that a bigger yield might not necessarily mean the best. Thus, it is important to put your money only in companies that are trustworthy and good. The thing with good companies is that even when there’s a drop in the price of the stock, the yield is fairly constant. Of course, that would mean a lesser dividend since it is calculated as a % of the current price of the share. However, in all honesty, let’s just say that it isn’t very easy for investors to pick the stocks that are good and bring in high yield. But to simplify the things for you, we have come up with a couple of factors that let you pick high-yield stocks, such as
- Payout ratio
It is a ratio that is calculated as a percentage of the income of the company, which is paid out as a dividend to the shareholders. For instance, if the company earns a profit of $2000, and from this profit, it gives out a dividend of $1000 to its investors, then for this company, the ratio of payout is 50%. For almost all the sectors, it is believed that a payout ratio between 55% and 75% is good. - Profit
The major driving force for every company is its profit. Thus, you should never put your money in a company that does not have a history of making a good profit year after year. See, the dividend is paid out of the profit, so it is pivotal for you to go with a profit-making company so that you can earn good dividends. Furthermore, more than the past and the present, the future is important. Thus, you should put your bet on a company that is capable of maintaining its profitability even in the future. It is possible only if the company is progressive and competitive to stay ahead of the other companies. - History of paying dividends
If you need a high-yield stock, you need to put in your money in a company that has paid dividends to its investors consistently for at least a decade. Additionally, you must do a quick check on its dividend growth. If the company has had a perennially growing dividend, it is a sign of a high-yielding stock. So, your money would be safe there. - Dividend yield
Lastly, as we discussed, though the high yield is great, investing in a company solely based on its high yield could be a slippery slope. Such a company might not grow to its full potential. So, stick to a company that gives in a dividend yield of approximately six percent.
High-yield stocks you can consider acquiring
By now, you have understood that your investment decision shouldn’t be solely based on the high yield. So, here, we have come up with a list of 5 of the best performing and high-yield stocks. We consider three factors before ranking them in this list: the history of dividend, growth seen in the stocks, and the credibility of the company.
- AT&T
At number one on our list is the famous telecommunication company AT&T. It is certainly a high yield stock, and has been paying dividends to its investors consistently for the last 36 years, and brings you a 5.3% dividend yield. - ExxonMobil
In the past year, one highest yielding sector was the energy sector. A popular name in this industry is the ExxonMobil. It is a good yield stock, which has been paying dividends to its investors consistently since 1982, and bags you 5% dividend yield. The company has only shown positive growth over the last 3 decades. - WP Carey
As far as the real-estate investment trusts are concerned, one legendary name in the industry is WP Carey. It is a company with a high dividend yield and has been paying dividends to its investors consistently for the last 2 decades. It fetches you a 5.2% dividend yield. - Dominion Energy
A big name in the electric power industry, Dominion Energy also offers high-yield stocks. The company has showcased a growth consistently for the past 16 years. Additionally, it gets you a 4.5% yield. - Apple
Last in the list is the smartphone leader Apple. Though with a dividend yield of only 1%, it might not look like the most lucrative option. However, when it comes to the company, on the whole, it is one where you know your money will stay safe. The company has had an ornamental history of paying great dividends. In the year 2019 only, the company saw an exponential boost of 84% in its stock price. So, it is certainly a safe bet.
